MORAL HAZARD CYCLES IN INDIVIDUAL-COVERAGE CROP INSURANCE

This paper examines the moral hazard implications of individual-covera ge crop insurance contracts. Individual-coverage contracts are informa tionally superior to standard contracts because the farmer's coverage is proportional to his average historical yield. Despite this apparent benefit, the steady-state solution is shown to be characterized by mo ral hazard cycles, where moral hazard is practiced in alternative peri ods. The amplitude of the cycle and, thus, the variability in planned production is shown to be larger the lower the degree of production un certainty, the fewer the number of years used in the averaging process , the higher the coverage threshold, and the lower the level of co-ins urance.